Sime Darby reported a 12.8% increase in headline net profit to RM389m for 2QFY23, mainly due to gain on disposal of the Weifang port companies and adjustment for depreciation, impairment and deferred tax. However, after stripping out non-operating items, core net profit for the quarter was down 26.4% YoY to RM243m despite an increase in revenue, mainly due to lower vehicle margins in Mainland China. The results were below both our and consensus expectations, accounting for 40.6% and 42.3% of full-year estimates, respectively. We keep our estimates unchanged however, on expectations of stronger contribution from its China operations in 2H23 underpinned by China’s reopening and gradual recovery in consumer confidence. We retain our Neutral call on Sime Darby with unchanged TP of RM2.37. On a side note, Sime Darby declared first interim dividend per share of 3.0 sen for the quarter (2QFY22: 4.0sen).

• 2QFY23 revenue grew by 7.6% YoY to RM11.3bn on higher revenue from Motor divisions (+11.8% YoY) due to a surge in auto sales in Malaysia, supported by high order backlogs and the Ministry of Finance’s (MOF) decision to extend the vehicle registration deadline to 31 March 2023 to enable car buyers who booked their vehicles by 30 June 2022 to still enjoy the sales tax exemption. Industrial division’s revenue in 2QFY23 was flat (+0.1% YoY), as the solid order book from Australasia region was offset by lower revenue from China due to disruptions in logistic activities and impacted lead time for machineries and order deliveries.

• 2QFY23 core net profit fell by 26.4% YoY to RM243m mainly due to lower profits from the Motors division despite higher revenue, as the results were impacted by lower profit margins due to intense competition. This was partly offset by higher profit from the Industrial division, mainly from the Australasia market due to higher parts revenue and profit contribution from the Salmon Earthmoving business. Profit before interest and tax (PBIT) margin for Motor division in China fell to 0.4% in 2QFY23 compared to 5.1% in 2QFY22. However, this was partly negated by higher contribution from Malaysia due to backlog of orders.

• Outlook brightens. China remains the Group’s largest revenue generator. The recent reopening and normalization of the supply chain bodes well for the Group’s business unit in China. As for its industrial equipment segment, the positive outlook for metallurgical coal is expected to continue driving demand for mining equipment and product support for the Australian market. Motor division’s order bank is still healthy, with new model launches across the Group’s regional operations expected to sustain sales momentum. However, the recent discontinuation of SST exemption is likely to impact sales and margins for the Malaysian market in 2HFY23.

Source: PublicInvest Research - 24 Feb 2023